NCR Bull Thesis: Edge Consulting Group

There's a lot been said about NCR over the past week, mostly by Spruce Point Capital @sprucepointcap and its frontman Ben Axler. Here's Spruce's initial report and their update from earlier this morning is here. We'd be remiss if we didn't mention that Jana Partners owns over 7% of the company and Marcato Capital is officially an activist (current 13D) in the name. 

Edge Consulting @EdgeCGroup is bullish on NCR, here's their from today: 

We notice that NCR Corporation (NCR), a provider of consumer transaction technologies, is currently on the activists radar.Two activist investors, Jana Partners (7.1% stake) and Marcato Capital Management (6.4% stake) are present in NCR occupying the first and second position on the top ten shareholders list, respectively, pushing the company to consider strategic alternatives (including potential sale or Spinoff) to create shareholder value. NCR is not new to Spinoff considering its Spinoff of Teradata (analytic data solutions company) back in September 2007, which registered a return of -4.3%, -9.6% and +1.1% within 6 months, 1 year and 2 year from the data of Spinoff, respectively and +68.8% till date compared to S&P 500 return of -10.3%, -15.1%, -29.1% and +43.2%, respectively during the same period.

Spinoff scenario: We see chances of a potential separation of the Financial Services segment from the remaining businesses of NCR. The Financial Services business is a high margin business with a 54.0% contribution to total revenue but 66.2% contribution to the total EBIT. We believe that the separation of the segment will create multiple re-rating opportunities for the new Financial Services company with the combined NCR trading at FY15E EV/EBIT multiple of 9.9x compared to its peers (Diebold, Fidelity National Information Systems & Fiserv) FY15 EV/EBIT multiple of >14x. Further, we also notice that Diebold, the closest peer of NCR in the ATM business, has a very low EBIT margin of 5.9% compared to NCR’s Financial Services margin of 15.2% but trades at FY15E EV/EBIT multiple of 14.0x compared to combined NCR’s multiple of 9.9x.

Takeover scenario: We also see NCR as a potential takeover target for big companies like Dover Corporation, Honeywell, IBM considering its steady top-line growth, good positioning amongst large players, low trading multiples and the share price decline of -12.1% over the last one year underperforming the S&P 500 index, which gave a return of +13.1% during the same period.